Bankruptcy Red Flag Filings

In many ways, bankruptcy laws are designed for lawyers. One leading creditor’s attorney claimed that some type of fraud in bankruptcy filings occurs in almost 100% of all cases! Changes in bankruptcy laws often favor creditors, and it seems that the idea is to make filing for bankruptcy more difficult. Ordinary citizens will need more information and better tools to prepare for possible missteps in bankruptcy, while some lawyers will see big benefits.

There are many “red flags” that wave in front of creditors and trustees, causing suspicion of fraud in bankruptcy filings.

A debtor never should try to lie his or her way into a bankruptcy court. The costs and risks are too high, no matter what pressure or stress you may feel. With creditors becoming increasingly suspicious and maybe even vicious, you should be aware of the arguments creditors will use to accuse you of fraud, even if you did not purposefully do so. Such debtors look especially for two big red flags:

• Delaying tactics. Trustees are impatient with both debtors and creditors who seem to be trying to delay proceedings. Creditors simply may be attempting to annoy, while debtors may be trying to hold on to property or slowly distribute assets.
• Transfers of assets within one year of filing, especially to friends or family, often for little or no value.

Specific evidence creditors may use to oppose discharge of a debt include:

• Repeated bankruptcy (“frequent filers”)
• Lack of usual records and accounts
• Blank spaces or repeated incomplete answers on schedules and filing forms
• Many cash dealings rather than credit
• Amendments to items such as prior year tax forms
• Very high debts with no stated income to match
• Odd bank actions, such as bounced checks
• An attorney known to be unscrupulous in bankruptcy (ask about any bar complaints and double-check)
• Run-up debts on credit cards before filing
• False social security numbers
• Incorrect credit references
• Owning a small business that shows low inventory and high debts
• Use of limited partnerships or other business forms to protect assets
• Use of mortgages and equity in several rental properties, with no apparent attempt to pay the mortgages
• Payment of high expenses, leases or at-home salary
• Many creditors contacting the Trustee about the filing
• Transfers of property interests through quit claims
• Claims of large gambling losses
• Large insurance policy claims or absence of property having been insured
• Tax returns, prior bankruptcies, lawsuits not listed as being filed by or against the debtor
• Savings, annuities or IRAs suddenly used up with no explanation
• The same attorney representing the debtor and anyone receiving assets from the debtor
• Complicated business dealings with the same people, in several business forms (corporations, partnerships, and sole proprietorships).

While these actions may be popular “evidence” for creditors, such measures do not necessarily indicate fraud. People do have the right to manage their debt to avoid maximum liability. The assumption now seems to be, unfortunately, that a debtor in bankruptcy is just trying to get away with something.

It more important than ever to plan a bankruptcy filing carefully, so that you can offer as much evidence as possible that you are honest, efficient and accurate in your finances.